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The Virginia Debt Controversy

The Virginia debt controversy involved disagreements about how to pay almost $34
million in state debt accrued between 1822 and 1861. The money had been spent on the
construction of canals, toll roads, and railroads, with the expectation that these
would contribute toward Virginia's future economic vitality. After the American Civil War (1861–1865) and the
creation of West
Virginia, Virginia's economy was in tatters. In 1871, the General
Assembly passed what came to be known as the Funding Act, which reduced the state debt, held West
Virginia responsible for a third of the principal, and allowed interest-bearing
coupons on debt bonds to be receivable for taxes. This caused a shortfall in revenue
and conflict with West Virginia. In time, two competing parties rose to prominence.
The Funders resisted any reduction on
the state debt lest it hurt Virginia's standing with creditors, while the Readjusters, seeing the debt as
threatening important state programs such as public schools, sought to "readjust," or
lower, the principal. With a biracial political coalition, the Readjuster Party
captured control of the General Assembly in 1879 and of the governor's office in 1881. In 1882, the
assembly passed the Riddleberger Act, which reduced the principal of the debt and the
interest owed. The Funders, having reorganized as Democrats, accepted the plan. With prompting from the
U.S. Supreme Court, West Virginia agreed in 1919 to pay its third of the debt.
Virginia's share of the debt was paid in 1937. MORE...

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Background

At issue was whether or how to pay almost $34 million in debt that the Commonwealth
of Virginia incurred when it sold bonds between 1822 and 1861 to raise money to
subsidize construction of canals, toll roads, and railroads. The state sold most of
the bonds during the 1850s for railroad construction and used the money to purchase
stock in the corporations that the General Assembly created for constructing what at
the time were called internal improvements. Most of the debt was in the form of bonds
that paid 6 percent annual interest and matured in thirty-four years. The Virginia
debt was by far the largest of any southern state when the Civil War began, and by
small margins it was the third largest in the United States, after only Pennsylvania
and New York. Per capita or per taxpayer, it was actually two or three times the
Pennsylvania or New York debts. At that time, the debt did not appear to present a
potential future problem for Virginia. Its creation reflected the overall confidence
of the state's business and political leaders that Virginia would prosper as an
integral participant in the increasingly sophisticated and integrated national
economy. Railroads were the key to that national and state prosperity.

When West Virginia became a state in June 1863, its constitution and the enabling
legislation passed by Congress and the General Assembly of the Restored government of
Virginia placed on the new state a responsibility to pay an equitable portion of the
debt. However, the two states could not agree after the war about how to ascertain
the amount, and after West Virginia adopted a new constitution in 1872, the state
declared that it owed nothing to Virginia or to Virginia's creditors.

Funding Act of 1871

The government of the Confederate state of Virginia paid almost no interest on the
debt during the Civil War. With the accruing interest, the debt rose to more than $45
million in March 1871, when the General Assembly passed "An Act to Provide for
the Funding and Payment of the Public Debt." Commonly called the Funding Act of
1871, it authorized the state to issue new bonds to replace the bonds then in
circulation but for only two-thirds of the face value of the old bonds. Without
asking West Virginia's permission, Virginia's legislators declared that
West Virginia owed one-third of the prewar debt of the old state. That further
alienated West Virginia, which until 1919 did not agree to pay anything. The Funding
Act required owners of old bonds to exchange them for the new bonds, which also paid
6 percent interest and were to mature in thirty-four years, and also required the
state to issue certificates with the new bonds that declared that the other third of
the principal would be paid after Virginia and West Virginia agreed on how to pay
it.

If all the old bonds had been exchanged for new bonds, the interest payments would
have cost the state more than half its annual revenue, but the Funding Act of 1871
made the interest-bearing coupons on the bonds receivable for taxes, which created a
large, new problem. Every dollar in taxes paid with coupons was a dollar that the
state could not spend. Within two years nearly half the state's revenue came
into the treasury in the form of coupons. The state began running deficits, leaving
the new public school system seriously underfunded and even forcing the assembly in
1872 to reduce annual interest payments on the new bonds to 4 percent.

In 1872 the assembly repealed the portion of the Funding Act that made the coupons
tax-receivable, but the Virginia Supreme Court of Appeals overturned that law. In Antoni v. Wright (1872), the judges declared that the coupons were
contracts between the state and its creditors and that the repeal of the coupon
provision was an impairment of the obligations of the contract and therefore a
violation of the Constitution of the United States.

Funders versus Readjusters

Virginia's politicians became increasingly divided about how to pay the debt and
what to do about the coupons. Those divisions wrecked the dominant Conservative Party, which had
been formed late in 1867 to oppose Congressional Reconstruction and the work of the
Constitutional
Convention of 1867–1868. A majority of political leaders during the 1870s
evidently supported some reduction of the interest rate, but bondholders and their
attorneys and allies in the General Assembly resisted proposals to reduce the
interest rate further or to reduce the amount of principal to be paid and, in effect,
repudiate a part of the debt.

The two opposing factions were called Funders and Readjusters. Funders insisted that
full payment of the debt would encourage northern and foreign financiers to invest in
Virginia and stimulate economic growth. Funders also argued that the state's
honor was at stake and that repudiation of any part of the debt would bring financial
ruin and make economic recovery after the financial panic of 1873 impossible.
Readjusters advocated a more radical reduction of the interest rate and also a
reduction in the amount of principal to be paid. They argued that the people needed
relief from the budget deficits that might require higher taxes and that threatened
to cripple the new public school system that was popular with both white and black
Virginia families. Readjusters denounced the Funders as Bourbons, after the
aristocratic opponents of reform in Revolutionary France.

While promoting their debt reduction plans, Readjusters appealed to poor white and
black voters and created a new biracial political alliance with an emerging
egalitarian political creed. It won support from African Americans as well as from
many white Republicans, Democrats, and Conservatives. In spite of the poll tax that Conservatives had added to the state
constitution in 1876 to reduce African American voting, more African Americans won election to the General Assembly between 1879 and 1885 than immediately
after the poll tax went into effect, indicating strong public support for refinancing
the debt to provide money for the schools.

William Mahone became the
leader of the Readjusters. He had been a general in the Confederate army and was one
of the state's most important railroad executives, founder of what became the
Norfolk and Western. A
short man with a long beard and inexhaustible energy, Mahone was a skilled and
domineering manager. He welcomed Republicans, old Democrats, disappointed
Conservatives, white farmers and working men, and African Americans into the
Readjuster coalition. He and the principal Readjuster leaders embraced the new public
school system, supported education and suffrage for African Americans, and appealed
as well for support from white working class men and farmers.

In 1878, the Readjusters in the General Assembly passed a bill designed to reduce
payment of taxes with coupons and to increase the amount of money in the treasury. It
was called the Barbour Bill, after its sponsor, Delegate James Barbour, and required that people pay 70
percent of all their taxes with money. That revenue would be dedicated to paying the
operating expenses of the state government and the public schools. People could pay
the other 30 percent with money or with coupons, and that revenue was dedicated to
paying interest on the debt, even though coupons could not be used for that purpose.

During debate in the Senate of Virginia, John W. Daniel declared that he would prefer that all
the schools in Virginia and even his own house be burned rather than divert revenue
from paying the debt into the school fund as the bill required. Governor Frederick W. M. Holliday
vetoed the bill and in the process denounced the new public school system as an
expensive luxury that the taxpayers should not have to support if it meant not paying
interest on the debt. Daniel's speech and Holliday's veto message gave
Readjusters political ammunition to denounce the Funders as agents of out-of-state
creditors and therefore as enemies of the welfare of ordinary Virginians.

Rise of the Readjusters

In February 1879, Mahone and the Readjusters formally created the Readjuster Party to
prepare for the legislative elections that fall. In the spring of 1879 following
negotiations between members of the General Assembly and a committee representing the
bondholders, the legislators passed and Holliday signed a bill designed to replace
the bonds issued in 1871 with new bonds that matured in forty years. Those bonds paid
three percent interest for the first ten years, four percent for the next twenty, and
five percent for the last ten. The assembly made the coupons from those bonds
receivable for taxes, too. The law was called the McCulloch Act, after former
Secretary of the Treasury Hugh
McCulloch who represented the bondholders. Some Readjusters called it the
Broker's Bill to identify who they believed most benefitted from it.

That act did not end the debt crisis, however, because the leading Readjusters
insisted on reducing the principal and reducing the interest rate even further. In
the legislative elections in 1879, Readjusters made the debt and the damage done to
the public school system the principal issue, and they won majorities in both houses
of the assembly. In 1880 they passed but Holliday vetoed a bill that would have
significantly reduced the principal and lowered the interest rate to three percent on
fifty-year bonds. It was called the Riddleberger Bill, after its sponsor, Harrison H.
Riddleberger, a member of the Senate of Virginia from the Shenandoah Valley.

In 1881 after most of the state's leading African American Republicans voted to form a coalition with them, the Readjusters won even larger majorities in both houses of the
General Assembly, and the voters elected William E. Cameron governor and a Readjuster lieutenant governor and attorney general. The 1881–1882
session of the General Assembly was the brief high tide for the Readjusters. The
assembly passed and Cameron signed a bill very like the Riddleberger Bill to replace
the bonds issued under the Funding Act of 1871 and the McCulloch Act of 1879.

The Riddleberger Act of 1882 significantly reduced the amount of the debt to be paid.
It repudiated all the interest that accrued during the Civil War and Congressional
Reconstruction; it deducted from the principal an amount that it declared represented
the excessive rate of interest paid under the funding acts of 1871 and 1879; and it
reduced the principal further by the estimated amount that the loss of the territory
of West Virginia and the abolition of slavery had reduced the state's tax base.
The law set the total Virginia public debt at a little more than $21 million and
provided for new fifty-year 3-percent bonds to pay that amount. It did not allow the
coupons from the bonds to be used for payment of taxes.

While the Readjusters held majorities in both houses of the General Assembly, they
elected Mahone and Riddleberger to the U.S. Senate, where Mahone caucused with the
Republicans. The Readjusters also repealed the poll tax, abolished use of the brutal
and humiliating whipping post, a form of punishment left over from slavery days and used almost exclusively on African Americans. They also reformed the tax
code and the state's colleges and universities.

In 1882 the Readjusters also passed several laws to make payment of taxes with
coupons clipped from the 1871 and 1879 bonds more difficult and expensive. The first
two of those laws were called Coupon Killers. In 1883, the U.S. Supreme Court in Antoni v. Greenhow upheld the constitutionality of Coupon
Killer No. 1, but in 1885 in Poindexter v. Greenhow declared Coupon Killer No. 2 unconstitutional.
Those were two of twenty-seven cases that reached the U.S. Supreme Court, all of them
on the question of the constitutionality of the anti-coupon laws that the General
Assembly passed between 1882 and 1887, the last of them called the Coupon
Crusher.

Most of the laws designed to make payment of taxes with coupons expensive and
difficult were passed after the Readjusters lost their majorities in the General
Assembly in the election of 1883. The Funders and Conservatives reorganized
themselves that year as a new state Democratic Party under the leadership of John S. Barbour, a railroad
executive whose interests had opposed Mahone's in the General Assembly a decade
earlier when they were both important Conservative Party leaders. The Democrats
realized that they would never regain the support of the voters on the issues of the
debt and the schools and sought to build a new white majority on the issue of race.
In 1883 they accepted the Riddleberger Act of 1882 as the final settlement of the
state debt and thereafter continued the campaign to prohibit payment of taxes with
coupons.

Debt Payment and Settlement with West Virginia

During the remainder of the 1880s, litigation about the constitutionality of Virginia
laws designed to prevent the payment of taxes with coupons delayed implementation of
the Riddleberger Act. Early in the 1890s, a consortium of New York bankers under the
leadership of Frederic P. Olcott acquired $23 million worth of 1871 and 1879 bonds
that had tax-receivable coupons and proposed to exchange them for $19 million worth
of new bonds without tax-receivable coupons. The state agreed to the proposal, which
enabled Virginia to pay the portion of the debt that the Riddleberger Act had
promised to pay but the legal disputes about coupons had prevented. In February 1892
the General Assembly passed the Olcott Act, which authorized the state to issue $19
million worth of new bonds that paid 2 percent interest for ten years and 3 percent
for ninety years. After issuing the century bonds, as they were called, the state
began buying them back, along with the outstanding Riddleberger bonds, to reduce the
amount of interest to be paid in the near term and to reduce the amount of principal
to be paid later.

On January 1, 1937, the state purchased most of the few bonds that remained in
circulation and thereby paid off the last remnant of the antebellum public debt.
Ironically, the closing of the books on the old debt attracted almost no notice. The
decades of raucous and divisive political controversies, financial headaches, and
prolonged litigation were all two or three generations in the past. The final
payments were so anticlimactic and involved such a relatively small sum of money that
they did not remind very many people of all of the tumults and difficulties that the
many problems arising from trying to pay the antebellum debt had once produced.

The Olcott Act was not the last step in the debt controversy. In 1906, after twelve
years of failed attempts to reopen negotiations with West Virginia about the third of
the antebellum debt that Virginia had not refinanced, Attorney General William A. Anderson filed
suit in the U.S. Supreme Court against West Virginia on behalf of the Commonwealth of
Virginia and a committee of bankers. The bankers and the state's Virginia Debt
Commission had joint custody of more than 90 percent of the certificates (called
Virginia Deferred Certificates) that the state had issued with each of the funding
acts. The certificates declared that that the one-third of the old Virginia debt that
the government of Virginia claimed the government of West Virginia owed would be paid
after the two states agreed on the amount and method.

During the next thirteen years, in a series of eight unanimous opinions that Chief
Justices Melville W. Fuller and Edward D. White as well as Associate Justices Oliver
Wendell Holmes Jr. and Charles Evans Hughes issued, the Supreme Court established
that West Virginia was, indeed, liable for a portion of the old debt. The judges
ascertained the amount at about $12.7 million but later reduced it after West
Virginia asked to be given credit for a portion of the assets of the old state at the
time the new state came into being. The Supreme Court fixed the rate of interest that
West Virginia should have paid during the interim and added that amount to the
principal, bringing the total back to about $12.4 million.

On April 1, 1919, the West Virginia Legislature passed a funding bill to pay a
somewhat lesser amount than the Supreme Court had established. The amount was
agreeable to Virginia and to the bankers and owners of the certificates, so the two
states therefore did not have to take the case back to the Supreme Court. West
Virginia issued $13.5 million in bonds that matured in twenty years and paid 3.5
percent annual interest to pay the certificate holders, to pay Virginia more than $1
million for certificates that it owned, and to pay owners of certificates who were
not parties to the suit. The long Virginia debt controversy was finally settled.

Time Line

1822–1861
- Virginia accrues about $34 million in public debt subsidizing the construction of canals, toll roads, and railroads.

1871
- Virginia's pre–Civil War public debt, with interest, totals more than $45.6 million.

March 30, 1871
- The General Assembly passes "An Act to Provide for the Funding and Payment of the Public Debt," or the Funding Act of 1871.

March 1872
- The General Assembly repeals the portion of the Funding Act that permits people to pay taxes with coupons.

August 22, 1872
- West Virginia voters ratify a new state constitution that declares the state owes nothing to Virginia or Virginia's creditors. Virginia is more than $45 million in debt, much of it due to internal improvements undertaken before West Virginia became a state.

February 22, 1878
- The General Assembly passes what comes to be known as the Barbour Bill, after James Barbour. It requires that a portion of the state's tax revenue be collected in money and not in coupons in order that the money can be spent on the public schools. The governor vetoes it.

February 25–26, 1879
- The Readjuster Party is founded at a convention in Richmond with the goal of "readjusting," or reducing the amount the principal of and the rate of interest on the state debt.

March 28, 1879
- The General Assembly passes the McCulloch Act, refinancing the state debt. Opponents dub it the Broker's Bill because they believe bond brokers and the owners of state-issued bonds are the chief beneficiaries.

March 1, 1880
- The General Assembly passes a bill to reduce the rate of interest on the debt to 3 percent for fifty years and to repudiate about one-third of the principal. The governor vetoes it.

March 14, 1881
- Almost 300 African American Republicans convene in Petersburg and decide to endorse the Readjuster Party in the important 1881 general election.

February 14, 1882
- The governor signs the Riddleberger Act, named after Harrison H. Riddleberger. It provides for fifty-year, 3-percent bonds on the debt, reduces the principal by about a third, and prohibits the payment of taxes with coupons.

March 5, 1883
- In Antoni v. Greenhow, the U.S. Supreme Court upholds the constitutionality of a Virginia law making it difficult and expensive to pay taxes using coupons clipped from state-issued bonds from 1871 and 1879.

April 20, 1885
- In Poindexter v. Greenhow, the U.S. Supreme Court declares unconstitutional a Virginia law making it difficult and expensive to pay taxes using coupons clipped from state-issued bonds from 1871 and 1879.

Early 1890s
- A consortium of New York bankers led by Frederic P. Olcott acquire $23 million worth of 1871 and 1879 Virginia-issued bonds that have tax-receivable coupons and propose to exchange them for $19 million of bonds without such coupons.

1892
- The General Assembly passes the Olcott Act, authorizing the state to issue $19 million worth of bonds that pay 2 percent interest for ten years and 3 percent for ninety years.

June 14, 1915
- In Virginia v. West Virginia, the U.S. Supreme Court rules that West Virginia owes Virginia a share of the combined states' pre–Civil War debt, or $4,215,622.28, before interest.

January 1, 1919
- West Virginia's share of Virginia's pre–Civil War debt, after interest, is $14,562,867.16.

July 3, 1919
- West Virginia officials deliver to the Virginia Debt Commission, in Richmond, $12,366,500 in bonds toward the state's share of Virginia's pre–Civil War debt. Another $1,133,500 in bonds is held in escrow.

July 30, 1919
- With the release of funds kept in escrow, Virginia and West Virginia officials agree that the latter state has paid its share of Virginia's pre–Civil War debt.

January 1, 1937
- Virginia purchases all remaining bonds associated with the Olcott Act of 1892 and thereby repays the last remnant of pre–Civil War public debt.